Budgeting for the new financial year

As you head towards the end of another financial year and look forward to the next one you should seriously consider preparing a budget in your business.

Preparing a budget for your business (and even personally) is highly recommended. This is because a budget sets some goals and targets to work towards and once you’re in the thick of things you can measure your performance against it. The budgeting process forces you to look at your financial health and a longer-term prognosis for the business. It is a time to rise above the day-to-day activities and really think about where you’ve been, where you are going and how you are going to get there.

Starting point for your budget

A good starting point for your budget is the current financial year you are in. Work out what your goals for the upcoming year are. This may include increased sales, reduced costs and new assets. Start putting together the numbers. A key consideration is that you want the budget to be ambitious but realistic.

Types of expenditure

Expenditure tends to fall into two main categories – fixed and variable. Fixed costs are those costs that you are going to incur regardless of how much income you generate like rent, salaries and insurance. Variable costs fluctuate depending on the activity in the business like raw materials, contractors and travel. The third category of expenditure is the one-off expenditure. This includes expenses that you may only incur every couple of years. Examples are tradeshows, advertising campaigns and the purchase of fixed assets. You also need to look at seasonal fluctuations. For example, if you are in a business that has periods that are busier than others due to some external factor like weather.

When to prepare a budget

Ideally a budget is prepared ahead of time with the best possible information available at the time. Things do change and this must be recognized as you go along. Key assumptions can change so you will need to adapt accordingly. The original budget document then turns into a forecast – a living document that is updated for these changes on a more frequent basis.

Business Like NZ Limited is well versed in budget and forecast preparation so contact us should you require some assistance.

Article by Rachel D